Legislature(2013 - 2014)HOUSE FINANCE 519

02/05/2013 01:30 PM House FINANCE


Download Mp3. <- Right click and save file as

Audio Topic
01:32:57 PM Start
01:33:38 PM Overview: Alaska Permanent Fund Corporation
03:02:39 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Permanent Fund Corporation by Mike TELECONFERENCED
Burns, Executive Director & Laura Achee, Director
of Communications & Adminstration, Permanent
Fund Corporation, Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                     February 5, 2013                                                                                           
                         1:32 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:32:57 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Austerman  called   the  House  Finance  Committee                                                                    
meeting to order at 1:32 p.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lindsey Holmes                                                                                                   
Representative Scott Kawasaki, Alternate                                                                                        
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative David Guttenberg                                                                                                 
Representative Mia Costello                                                                                                     
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Mike  Burns,  Executive   Director,  Alaska  Permanent  Fund                                                                    
Corporation,  Department of  Revenue; Laura  Achee, Director                                                                    
of Communications and  Administration, Alaska Permanent Fund                                                                    
Corporation, Department of Revenue.                                                                                             
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^OVERVIEW: ALASKA PERMANENT FUND CORPORATION                                                                                  
                                                                                                                                
1:33:38 PM                                                                                                                    
                                                                                                                                
MIKE  BURNS,  EXECUTIVE   DIRECTOR,  ALASKA  PERMANENT  FUND                                                                    
CORPORATION  (APFC),  DEPARTMENT   OF  REVENUE,  provided  a                                                                    
PowerPoint  presentation   titled  "Alaska   Permanent  Fund                                                                    
Corporation Designed for Sustainability"  (copy on file). He                                                                    
pointed  to   slide  2   titled  "Renewable   Resource."  He                                                                    
discussed that  the corporation's accounting  was confusing,                                                                    
which   was  exacerbated   by   new  government   accounting                                                                    
standards.  He referred  to the  information on  slide 2  as                                                                    
"checkbook" accounting.  He communicated that  $16.5 billion                                                                    
had been  deposited to  the Alaska  Permanent Fund  (APF) to                                                                    
date,  $19.8 billion  in dividends  had been  paid, and  the                                                                    
fund's current value  was $45 billion. He  believed the fund                                                                    
had  been  incredibly  successful  and  felt  that  Alaskans                                                                    
should be proud  of the accomplishment. He moved  to slide 3                                                                    
that showed  fiscal year to  date (FYTD) returns for  FY 13;                                                                    
the total FYTD return was  7.3 percent, the benchmark return                                                                    
was 7.4  percent, the ending  balance was $43.7  billion and                                                                    
the change from  FY 12 was $3.4 billion. He  shared that the                                                                    
return through the end of  January 2013 was 10.4 percent and                                                                    
the fund  balance was  $44.9 billion.  He stressed  that the                                                                    
fund investment strategy focused  on the long-term, but some                                                                    
individual months were very successful (e.g. January 2013).                                                                     
                                                                                                                                
Mr. Burns  moved to  slide 4 related  to FY  12 performance.                                                                    
The total return had been  -0.01 percent with a benchmark of                                                                    
-0.2  percent. The  fund's  FY 12  ending  balance had  been                                                                    
$40.3 billion. He addressed the  fund's performance over the                                                                    
past  28.5 years  on slide  5. He  noted that  the fund  had                                                                    
existed  beyond  28.5  years,   but  the  records  from  the                                                                    
performance consultant  only went back that  far. The fund's                                                                    
performance during the 28.5 year  period was 8.8 percent. He                                                                    
highlighted  that  2008 and  2009  had  been devastating  on                                                                    
returns as  seen in  the 5-year  performance of  1.2 percent                                                                    
compared to  the 3-year  return of  10.4 percent.  He shared                                                                    
that the 2008 calendar year was  one of the 3 worst years in                                                                    
the 200-year  history of available stock  market records. He                                                                    
relayed that the  other worst returns had  occurred prior to                                                                    
the war of 1812 when the  U.S. had cut off trade with France                                                                    
and England.                                                                                                                    
                                                                                                                                
1:39:20 PM                                                                                                                    
                                                                                                                                
Mr. Burns directed attention to  the fund's asset allocation                                                                    
on  slide  6.  Categories   included  real  assets,  company                                                                    
exposure,  opportunity pool,  cash, and  interest rates.  He                                                                    
noted  that  assets  within  each  of  the  categories  were                                                                    
grouped by  risk. Real  assets accounted  for 19  percent of                                                                    
the  fund  and  worked  to protect  against  inflation;  the                                                                    
category included real  estate, Treasury Inflation Protected                                                                    
Securities  (TIPS), infrastructure,  and other.  The company                                                                    
exposure  category included  all public,  private, domestic,                                                                    
international  equity  and   corporate  debt.  The  grouping                                                                    
allowed fund investors  to move in the  capital structure of                                                                    
companies  and industries  (e.g. money  could be  moved from                                                                    
credit to equity) and enabled  the fund to take advantage of                                                                    
growth and  prosperity cycles.  The interest  rates category                                                                    
included  U.S. treasuries  and sovereign  debt of  developed                                                                    
countries,  which   worked  to  protect  the   fund  against                                                                    
deflation.  The  other  opportunity pool  accounted  for  18                                                                    
percent  of  the  fund's   allocation  and  included  market                                                                    
anomalies  and special  opportunities discovered  over time.                                                                    
He  explained   that  while  the  other   asset  allocations                                                                    
represented targets, the opportunity  pool was limited to 18                                                                    
percent given  that special opportunities did  not exist all                                                                    
of the  time. He noted  that any money  that did not  have a                                                                    
"special opportunity  home" went  into the  company exposure                                                                    
allocation. He  communicated his  intent to  further explain                                                                    
the slide later in the presentation.                                                                                            
                                                                                                                                
1:42:38 PM                                                                                                                    
                                                                                                                                
Mr. Burns pointed to a  handout titled "Total Fund Value" as                                                                    
of February 1, 2013 (copy  on file). The chart included rows                                                                    
for  each asset  allocation and  columns showed  traditional                                                                    
asset  classes [e.g.  equities,  fixed  income, and  other].                                                                    
Slide  7 included  a pie  chart of  the fund's  target asset                                                                    
allocation:  stocks  36  percent, real  estate  12  percent,                                                                    
absolute  return  6  percent,   private  equity  6  percent,                                                                    
infrastructure 4 percent, cash  2 percent, bonds 20 percent,                                                                    
and  other  12  percent  (a  small  blue  unlabeled  segment                                                                    
represented public/private credit  including mezzanine debt,                                                                    
high yield, and other).                                                                                                         
                                                                                                                                
Mr.  Burns  turned   to  slide  8  titled   "The  Effect  of                                                                    
Diversification." The  yellow line  on the chart  showed the                                                                    
total  fund's  performance  from 2007  to  2012;  individual                                                                    
asset classes were represented in  blue. The slide's purpose                                                                    
was  to demonstrate  the importance  of diversification  and                                                                    
how the  success of each  asset class fluctuated  with time.                                                                    
He relayed  that APFC  looked forward and  not back;  it did                                                                    
not operate as a market  timer. He detailed that targets for                                                                    
each  asset  class  also included  bands;  there  was  "risk                                                                    
dashboard"  on 20  items that  was looked  at each  day. The                                                                    
dashboard  included   red,  green,  and  yellow   zones.  He                                                                    
elaborated that  the chief investment officer  and staff had                                                                    
the authority  to trade within  the green zone;  approval by                                                                    
the  executive  director  was required  to  operate  in  the                                                                    
yellow  zone; and  the board  was notified  when investments                                                                    
moved into the  red zone. The board could  request a special                                                                    
meeting, members  could request individual  explanations, or                                                                    
the board  could accept the staffs'  written explanation. He                                                                    
elaborated  that  moving  into  the  yellow  and  red  zones                                                                    
triggered  a discussion  about  investments.  He noted  that                                                                    
there could be  a reason for moving into the  areas and that                                                                    
the  goal may  be to  be light  in specific  investments. He                                                                    
furthered that  the board was  apprised of the  yellow zones                                                                    
at its  regular meetings. He relayed  that sometimes markets                                                                    
were unfavorable  and it  was not  possible to  adjust asset                                                                    
classes  such as  real estate  and infrastructure;  however,                                                                    
liquid asset classes could be adjusted.                                                                                         
                                                                                                                                
1:47:42 PM                                                                                                                    
                                                                                                                                
Mr. Burns  stated that one  of the fund's  biggest strengths                                                                    
was that  it was multi-generational;  it had the  ability to                                                                    
take  a very  long-term  view and  could handle  illiquidity                                                                    
better  than  most  funds.  He  detailed  that  historically                                                                    
illiquid assets  provided a better  return because  they did                                                                    
not  require a  liquidity  premium. The  long-term view  was                                                                    
taken as much as possible  (sometimes in illiquid assets and                                                                    
private markets).  He relayed more money  was being invested                                                                    
in illiquid assets over time.  He pointed to slide 27 titled                                                                    
"Risk  Dashboard: Dollar  Allocation Limits."  He reiterated                                                                    
his earlier testimony that the  dashboard was generated on a                                                                    
daily basis; risk measures  included country, liquidity, and                                                                    
other. The corporation  was proud of the  dashboard that had                                                                    
been developed  internally. He added  that the  overall zone                                                                    
parameters were reviewed on an annual basis.                                                                                    
                                                                                                                                
Mr.  Burns addressed  slide 9  titled  "2012 Performance  by                                                                    
Asset Class." He  relayed that the fund  had performed close                                                                    
to  and  slightly  better  than   benchmark  in  most  asset                                                                    
classes,  with the  exception of  real  estate and  absolute                                                                    
return. He communicated  that it was difficult  to match the                                                                    
NCREIF  index [National  Council of  Real Estate  Investment                                                                    
Fiduciaries].  He  explained  that  the  index  used  higher                                                                    
leverage  than  APFC; in  difficult  markets  the APF  would                                                                    
outperform the index. He shared  that leverage was generally                                                                    
used  in  partnerships in  the  real  estate portfolio.  For                                                                    
example, the  fund owned  50 percent  of two  large shopping                                                                    
centers with  a public  retail REIT [Real  Estate Investment                                                                    
Trust].  The fund  returns had  also fallen  well below  the                                                                    
absolute  return  benchmark.  He   detailed  that  APFC  had                                                                    
created the absolute return benchmark  in 2004; it had never                                                                    
met  the  benchmark  and  it was  clearly  not  the  correct                                                                    
target. He believed  APFC had held out for  managers to earn                                                                    
LIBOR  [London  Interbank  Offering  Rate]  plus  400  basis                                                                    
points; however, the asset class  did not generate income at                                                                    
that level.  The corporation was  in the process  of looking                                                                    
at the  HFR Index [Hedge  Fund Research]; APFC  managers had                                                                    
consistently beaten the HFR Index.                                                                                              
                                                                                                                                
LAURA ACHEE, DIRECTOR  OF COMMUNICATIONS AND ADMINISTRATION,                                                                    
ALASKA  PERMANENT FUND  CORPORATION, DEPARTMENT  OF REVENUE,                                                                    
used  the poor  absolute return  performance on  slide 9  to                                                                    
point  out  the   importance  of  portfolio  diversification                                                                    
spread across a multitude of asset classes.                                                                                     
                                                                                                                                
1:53:36 PM                                                                                                                    
                                                                                                                                
Mr. Burns turned  to slide 10 titled  "Stock Portfolio." The                                                                    
inner  ring  of  a  circular   chart  included  the  active,                                                                    
passive,  and   quasi-passive  methods  of   management  for                                                                    
accessing  equity;  active management  represented  slightly                                                                    
over 50 percent of the  management options. He detailed that                                                                    
passive  management  followed  indices, which  was  momentum                                                                    
driven. As  a stock  became increasingly successful  it made                                                                    
up  a larger  portion  of the  index; he  used  Apple as  an                                                                    
example.  He   added  that  under  passive   management  the                                                                    
purchase price  was typically high  because it  followed the                                                                    
success of  a stock.  Quasi-passive compared and  ranked the                                                                    
fundamentals (sales  growth, earnings growth, and  other) of                                                                    
various companies. Active management  was the most expensive                                                                    
and passive  was the cheapest. Quasi-passive  was more value                                                                    
driven. The  next ring represented APFC's  three portfolios:                                                                    
U.S.,  non-U.S.,  and  global.   He  explained  that  global                                                                    
managers could  invest in U.S. and  non-U.S. investments. He                                                                    
listed major  global exposure  including Japan,  U.S., U.K.,                                                                    
Asia, Europe, and other.                                                                                                        
                                                                                                                                
1:56:19 PM                                                                                                                    
                                                                                                                                
Mr.  Burns directed  attention to  slide 11,  which included                                                                    
the  fund's top  5  holdings as  of  12/31/2012. Top  stocks                                                                    
included  Apple,  Samsung,   Google,  Microsoft,  and  Exxon                                                                    
Mobil.                                                                                                                          
                                                                                                                                
Ms. Achee  added that  the chart showed  the top  5 holdings                                                                    
out of the 6,000 individual securities owned by the fund.                                                                       
                                                                                                                                
Mr. Burns  remarked that some  of the 6,000  securities were                                                                    
owned by multiple APFC investment  managers on behalf of the                                                                    
fund. He added that Exxon Mobil  may be the fund's top stock                                                                    
currently. Slide  12 illustrated the fund's  bond portfolio,                                                                    
which included  corporate, treasuries,  non-U.S. government,                                                                    
mortgage-backed,  commercial   mortgage  backed  securities,                                                                    
non-U.S. corporate.  He noted that non-U.S.  bonds accounted                                                                    
for 7 percent of the  portfolio. He continued to discuss the                                                                    
bond portfolio on slide 13.  The slide included two circular                                                                    
charts,  which showed  that  the  portfolio's percentage  of                                                                    
non-U.S.  bonds had  decreased  in the  last  six months  of                                                                    
2012. He  explained that the legislature  had approved funds                                                                    
for  two additional  fixed income  staff the  prior year  in                                                                    
order to  allow APFC  to begin managing  international fixed                                                                    
income internally; he noted that  the savings were dramatic.                                                                    
During the  time APFC was  preparing to make  the transition                                                                    
from external  managers to in-house management  Europe began                                                                    
to have substantial financial  problems; therefore, APFC had                                                                    
elected to  hold off on  making the change. He  relayed that                                                                    
initially  the fund  had approximately  $950  million to  $1                                                                    
billion in non-U.S. bonds  (primarily in developed nations);                                                                    
however, it  had reduced its exposure  to approximately $300                                                                    
million. He noted  that APFC was getting  close to reversing                                                                    
the decision and filling the positions.                                                                                         
                                                                                                                                
Ms. Achee added  that the APFC managed portion  shown in red                                                                    
(slide 13) would be larger in the following year.                                                                               
                                                                                                                                
Mr. Burns  agreed. He remarked  that internal  management in                                                                    
any  area  was  dramatically   less  expensive  compared  to                                                                    
external  management.  He   continued  to  discuss  internal                                                                    
management and noted  that there were some  items that could                                                                    
not be  managed in-house. He  added that APFC did  not spend                                                                    
GF money; it was funded by receipt authority.                                                                                   
                                                                                                                                
2:02:00 PM                                                                                                                    
                                                                                                                                
Mr. Burns directed attention to  real estate on slide 14. He                                                                    
believed   the   allocation    was   managed   economically;                                                                    
management  was conducted  both  internally and  externally.                                                                    
The  fund used  five  direct equity  managers  and one  REIT                                                                    
manager.  He discussed  real  estate's  illiquid nature.  He                                                                    
stated that the  closest proxy to owning real  estate was to                                                                    
own REITs. The portfolio consisted  of 33 percent office, 30                                                                    
percent  retail, 25  percent multifamily,  7 percent  REITs,                                                                    
and 5 percent industrial.  He communicated that the barriers                                                                    
to  entry in  industrial real  estate were  not high,  which                                                                    
made   it  difficult   for  long-term   investors  to   find                                                                    
attractive properties.  He observed that it  was possible to                                                                    
have  the  best  warehouse  one   year  only  to  see  other                                                                    
identical warehouses built in the area the following year.                                                                      
                                                                                                                                
Mr.  Burns looked  at the  portfolio's Tysons  Corner Center                                                                    
real estate investment on slide  15. He shared that the fund                                                                    
had owned the  property for many years,  which was beginning                                                                    
an  expansion phase.  He detailed  that the  property had  2                                                                    
million square feet  of developed space; he equated  it to a                                                                    
small city.  He elaborated  that the Washington,  D.C. train                                                                    
system was  planned to extend  to Dulles and  currently went                                                                    
two  stops  past the  center.  He  elaborated on  the  train                                                                    
system. The building shown on  the right had 440 apartments,                                                                    
the  middle  building  was  a  500,050  square  foot  office                                                                    
building, and  the third  building would  be a  Hyatt hotel;                                                                    
the buildings were all currently under construction.                                                                            
                                                                                                                                
2:07:14 PM                                                                                                                    
                                                                                                                                
Mr.  Burns continued  to discuss  Tyson's  Corner Center  on                                                                    
slide  15. The  office building  was 65  percent pre-leased;                                                                    
the  lead  tenant  was Intelsat.  He  believed  leasing  the                                                                    
remaining 35 percent would not  be difficult. He opined that                                                                    
the apartments would be attractive  and would fill a need in                                                                    
the  area; 20  of the  units would  be marketed  at a  lower                                                                    
price. He discussed the expense  of new parking, which would                                                                    
be below  ground; the  spaces would be  shared by  the hotel                                                                    
and retail  customers. He believed  that sharing  the spaces                                                                    
had  saved $50,000  per  parking space.  He  added that  the                                                                    
project used approximately 40 percent leverage.                                                                                 
                                                                                                                                
2:09:52 PM                                                                                                                    
                                                                                                                                
Mr.  Burns looked  at the  real estate  investment 299  Park                                                                    
Avenue on slide  16. The office building was  42 stories and                                                                    
was located  next to the  Waldorf Astoria hotel.  The fund's                                                                    
investment  partner  was  Fisher Brothers,  who  owned  five                                                                    
major skyscrapers  in New  York. He  shared that  the Fisher                                                                    
family had  built approximately 60 Fisher  Houses across the                                                                    
country that  were aimed at accommodating  family of injured                                                                    
soldiers. He  pointed to the  building value  [$1.2 billion]                                                                    
and  added that  the building  was approximately  50 percent                                                                    
leveraged. He  remarked that  investments in  Manhattan were                                                                    
typically liquid assets.                                                                                                        
                                                                                                                                
Mr. Burns directed attention to  the CityCenter II, III, and                                                                    
IV properties on  slide 17 (CityCenter III was  shown on the                                                                    
slide). The  properties were office  and retail,  which were                                                                    
located  next  to hotels  and  two  interstates in  Houston,                                                                    
Texas.  He detailed  that CityCenter  II  was fully  leased,                                                                    
CityCenter  III  was  close to  or  completely  leased,  and                                                                    
CityCenter IV  was under construction. He  remarked that the                                                                    
property did  not carry a  Manhattan price tag  [$50 million                                                                    
property  value]. He  moved to  the  residential Parc  Huron                                                                    
property  located in  Chicago (slide  18). The  property had                                                                    
been  marketed  as  condominiums,  which had  not  sold.  He                                                                    
believed   converting   the   units   from   apartments   to                                                                    
condominiums  could  bring  a  high  payout;  however,  APFC                                                                    
currently  had no  plans to  make the  conversion. Slide  19                                                                    
pertained  to  the Simpson  Housing  LLLP  based in  Denver,                                                                    
Colorado.  The corporation  and the  State of  Michigan each                                                                    
owned 47 percent;  the balance was owned  by management. The                                                                    
real estate  operating company had 16,000  units nationwide.                                                                    
He explained that  the partnership was in the  third year of                                                                    
a five-year plan to expand  and update the properties; older                                                                    
product  would  be  sold  and   replaced.  He  relayed  that                                                                    
apartments  were the  "hottest asset  class," which  made it                                                                    
difficult to purchase properties that penciled out.                                                                             
                                                                                                                                
2:14:26 PM                                                                                                                    
                                                                                                                                
Mr.  Burns  discussed  private assets  on  slide  20,  which                                                                    
included  private equity,  infrastructure, American  Homes 4                                                                    
Rent, and  private credit. He  detailed that  private credit                                                                    
included mezzanine debt, bank  loans, syndicated bank loans,                                                                    
and other. He moved to slide  23 related to American homes 4                                                                    
rent;  APFC owned  80  percent and  the  operator owned  the                                                                    
remaining  20 percent.  The head  of operations  had started                                                                    
Public  Storage,  which was  larger  than  all other  public                                                                    
storage  companies combined.  The homes  were single  family                                                                    
and had been purchased at  foreclosure sales. He shared that                                                                    
in the past there had  been no asset class for institutional                                                                    
ownership  of   single  family  homes;  however,   that  had                                                                    
changed. He discussed that the  partner had done a great job                                                                    
operating  the venture,  which included  approximately 4,700                                                                    
houses  in various  states.  The  corporation had  committed                                                                    
$600  million  to  date;  the   partner  had  invested  $150                                                                    
million. He  shared that  two of the  states APFC  had liked                                                                    
the  most were  Texas  and Georgia;  every foreclosure  sale                                                                    
occurred  on the  first Tuesday  of each  month, which  made                                                                    
logistics challenging.  He noted that Atlanta  was the focus                                                                    
in Georgia,  but the  market was  large and  challenging. He                                                                    
listed Texas  property locations including  Dallas, Houston,                                                                    
San Antonio, and Austin.                                                                                                        
                                                                                                                                
2:18:29 PM                                                                                                                    
                                                                                                                                
Mr. Burns  continued to speak  to slide 23 and  relayed that                                                                    
competition  for  the  homes   was  tight.  He  stated  that                                                                    
individuals  were walking  around with  stacks of  cashier's                                                                    
checks. He  continued to discuss the  home purchase process.                                                                    
He communicated that  American Homes 4 Rent  had expanded to                                                                    
over  300 contract  employees in  the past  year. He  talked                                                                    
about  the  condition  of the  homes.  The  partnership  may                                                                    
choose to sell the houses  when they appreciated or may sell                                                                    
them to  a REIT  or to another  aggregator. He  relayed that                                                                    
the investment  was expected to  bring in  a 6 percent  to 7                                                                    
percent yield; there was no leverage used.                                                                                      
                                                                                                                                
2:20:36 PM                                                                                                                    
                                                                                                                                
Mr.  Burns  explained  that   private  equity  consisted  of                                                                    
purchasing companies that were  not publicly traded. Private                                                                    
equity  could  include the  sale  of  a family  company  for                                                                    
estate  planning purposes,  the sale  of a  subsidiary of  a                                                                    
major  corporation that  no longer  fit  with the  company's                                                                    
long-term  goals,   or  other.   The  asset  class   used  a                                                                    
significant  amount  of  leverage;  however,  APFC  believed                                                                    
returns were better  than those on public  equity. The asset                                                                    
class  was  limited to  6  percent  in the  APFC  portfolio;                                                                    
however, it had not reached  that amount. Money from earlier                                                                    
investments was paying out,  while the corporation continued                                                                    
to  make new  investments.  He shared  that APFC  consultant                                                                    
Callan Associates had to put  a limitation on private equity                                                                    
when making investment recommendations.                                                                                         
                                                                                                                                
Mr. Burns addressed infrastructure  investments on slides 21                                                                    
and  22.   He  relayed   that  infrastructure   assets  were                                                                    
traditionally  government   owned  or   regulated.  Examples                                                                    
included  toll  roads,  pipelines,  electrical  transmission                                                                    
lines,  ports,  airports,  and other.  The  corporation  was                                                                    
invested in  three partnerships with properties  in the U.S.                                                                    
the  United  Kingdom,  India,   Argentina,  and  Canada.  He                                                                    
elaborated  that holdings  included  a propane  distribution                                                                    
system  in   India,  the   airport  in   Vancouver,  British                                                                    
Columbia, and the  Gatwick and City airports  in London. The                                                                    
legislature had approved  a new co-investment infrastructure                                                                    
position in  FY 13.  He detailed  that when  APFC negotiated                                                                    
contracts  with  partnerships  it  was  specified  that  the                                                                    
corporation would never  invest more than a  set amount into                                                                    
a project;  if a  project was over  the set  amount, another                                                                    
investor was required. He expounded  that APFC bargained for                                                                    
co-investment  rights   and  the  co-investment   staff  and                                                                    
outside  consultant could  make an  independent decision  on                                                                    
projects. He  relayed that private investment  had expensive                                                                    
fees; whereas co-investment had no  fees. He stated that the                                                                    
staff could save the corporation  millions or nothing, given                                                                    
that staff  may decide not  to invest in many  projects. The                                                                    
corporation believed the position was a good investment.                                                                        
                                                                                                                                
2:25:26 PM                                                                                                                    
                                                                                                                                
Mr.   Burns  looked   at   slide   24  titled   "Multi-asset                                                                    
strategies."  He discussed  the  corporation's affinity  for                                                                    
emerging markets. Significant  emerging markets included the                                                                    
BRIC  countries (Brazil,  Russia, India,  and China),  which                                                                    
were  sometimes altered  and referred  to  as BRIM  (Brazil,                                                                    
Russia,  India, and  Mexico). The  corporation believed  the                                                                    
markets  would   grow  more  significantly   than  developed                                                                    
markets.  He referred  to emerging  market  debt and  equity                                                                    
managers  (two had  been  found in  the  same company).  Cap                                                                    
Guardian   and  PIMCO   managed   APFC's  emerging   markets                                                                    
investments across  three asset classes (equity,  bonds, and                                                                    
currency). The  investment managers had the  ability to move                                                                    
money back  and forth  between the  three asset  classes. He                                                                    
relayed that APFC was happy with the results thus far.                                                                          
                                                                                                                                
Mr.  Burns explained  that absolute  return  was hedge  fund                                                                    
investing and  was the  least risky  asset class.  He shared                                                                    
that it was  necessary to take more risk  than APFC managers                                                                    
currently took.  He elaborated that  the three  managers had                                                                    
consistently outperformed the hedge  fund indices; the index                                                                    
had  not   surpassed  LIBOR  plus  400   basis  points.  The                                                                    
corporation planned to examine  its current policies related                                                                    
to absolute  return. There were 157  underlying investments,                                                                    
6 were  owned by more  than one  manager. The risk  had been                                                                    
spread, which was  expensive, but diversification protection                                                                    
was necessary  in order to limit  potential financial impact                                                                    
if one of the investments failed.                                                                                               
                                                                                                                                
Ms.  Achee noted  that the  corporation's risk  exposure was                                                                    
approximately $10  million to $15 million;  if an investment                                                                    
did fail the  company would not lose more  than this amount.                                                                    
She noted the figures were significant, but not disastrous.                                                                     
                                                                                                                                
2:29:26 PM                                                                                                                    
                                                                                                                                
Mr. Burns addressed  the APFC external CIO  program on slide                                                                    
26. The  program was  in its second  year and  five managers                                                                    
had been  hired out  of a larger  pool. The  corporation was                                                                    
interested to  know how  the managers  would invest  if they                                                                    
were  "unshackled";   he  noted  APFC  had   not  completely                                                                    
unshackled them. The managers  had been instructed to invest                                                                    
money in any way they  believed would be the most successful                                                                    
with  the exception  of real  estate and  provided that  the                                                                    
money would be  available in two years. Slide  26 showed pie                                                                    
charts for two of the  managers including PIMCO and GMO. The                                                                    
investment  strategies  were  very different;  GMO  invested                                                                    
more heavily  in equities  (shown in  green). He  added that                                                                    
other  managers had  very little  invested in  equities. The                                                                    
goal was  broad style  diversification; the  corporation was                                                                    
pleased  with the  outcomes. He  continued that  one of  the                                                                    
managers    had   outperformed    expectations;   GMO    had                                                                    
underperformed; however, the company's  style was to wait it                                                                    
out  until valuations  came its  way. He  remarked that  the                                                                    
company had  lost half of  its business when it  had refused                                                                    
to invest in the dot-com era  because it did not believe the                                                                    
valuations made sense. The company's  strategy was to invest                                                                    
at  the bottom.  He relayed  that  one of  the external  CIO                                                                    
managers  was invited  to speak  at each  of the  APFC board                                                                    
meetings.                                                                                                                       
                                                                                                                                
2:32:06 PM                                                                                                                    
                                                                                                                                
Mr.  Burns  detailed  slide 28:  "Financial  Networks."  The                                                                    
slide   illustrated   all   APFC  systems   and   how   they                                                                    
interrelated. He  remarked on  the system's  complexity. The                                                                    
system  required substantial  security  to  protect it  from                                                                    
hackers  in various  nations. He  relayed  that the  systems                                                                    
shown on  slide 28  were needed  to run  the $45  billion in                                                                    
funds.                                                                                                                          
                                                                                                                                
Ms. Achee  discussed the APFC  systems that were  created by                                                                    
independent   software   companies   specializing   in   the                                                                    
particular   area.  She   explained  that   the  information                                                                    
technology staff was tasked with  working to ensure that the                                                                    
various  systems  were   compatible  and  could  communicate                                                                    
effectively. She  mentioned the difficulty  of incorporating                                                                    
the   different   technologies.   She  stressed   that   the                                                                    
technologies were  instrumental in enabling  the corporation                                                                    
to  compete  with global  investors.  She  relayed that  the                                                                    
corporation would be  requesting funds in years  to come for                                                                    
new systems and consulting on existing systems.                                                                                 
                                                                                                                                
2:35:08 PM                                                                                                                    
                                                                                                                                
Mr.  Burns addressed  dividend calculation  on slide  29. He                                                                    
explained that  statutory net  income was  the corporation's                                                                    
cash  flow;  it  included   dividends,  interest,  and  rent                                                                    
received and  realized capital  gains. The  Alaska Permanent                                                                    
Fund  Dividend (PFD)  calculation  used  five fiscal  years.                                                                    
Each year  the income from  the earliest of the  five fiscal                                                                    
years  dropped  off as  the  most  current fiscal  year  was                                                                    
added. He  pointed to the $2.9  billion figure in FY  08 and                                                                    
commented that  it was  unlikely a  number that  large would                                                                    
replace it.  The corporation anticipated that  the PFD would                                                                    
decrease again  in the current  year. He detailed  that when                                                                    
the negative $2.5 billion figure  from FY 09 dropped off the                                                                    
formula would  change dramatically. He believed  that in the                                                                    
next five years statutory net  income would continue to be a                                                                    
small  number despite  fund growth.  He elaborated  that the                                                                    
largest component  had historically been from  fixed income,                                                                    
but with the  10-year treasury at 2 percent  to 2.4 percent,                                                                    
it would not bring  significant earnings; low interest rates                                                                    
would hold the statutory net income down for some time.                                                                         
                                                                                                                                
Ms.  Achee  noted  that  there  was  no  direct  correlation                                                                    
between mineral  royalties (oil  included) and  the dividend                                                                    
calculation   (slide  31).   She  explained   that  incoming                                                                    
royalties  boosted  the  PFD's total  principal  value  over                                                                    
time,  which   did  increase   statutory  net   income.  She                                                                    
elaborated that the  royalties did add to the  dividend in a                                                                    
subtle way over time.                                                                                                           
                                                                                                                                
Mr.  Burns  discussed  peer  recognition  on  slide  32.  He                                                                    
relayed  that  APFC had  won  an  aiCIO industry  innovation                                                                    
award two  years earlier. He  shared that APFC met  with the                                                                    
Singapore  Government  Investment   Corporation  on  several                                                                    
occasions;  Singapore  had  two  of  the  largest  sovereign                                                                    
wealth funds  in the  world. Other  public and  private fund                                                                    
managers APFC  had met with  included the  Norway Government                                                                    
Pension   Fund,   Mitsubishi    UFJ   Trust   and   Banking,                                                                    
Massachusetts  PRIM,  California State  Teachers  Retirement                                                                    
System, and the University of  California. He added that the                                                                    
representatives   with   the   major   Japanese   government                                                                    
investment fund would  be visiting APFC in  the near future.                                                                    
He stated the APFC was  essentially a sovereign wealth fund.                                                                    
He  pointed  to an  international  group  that included  all                                                                    
sovereign wealth  funds; the  two U.S.  representatives were                                                                    
the U.S. treasury and APFC.  He believed the corporation had                                                                    
a good reputation.                                                                                                              
                                                                                                                                
2:39:32 PM                                                                                                                    
                                                                                                                                
Representative Wilson  wondered why  APFC was  not investing                                                                    
in  infrastructure  in  Alaska.  She  believed  the  message                                                                    
implied that  Alaska projects were  not worth  investing in.                                                                    
She asked if  a project or two could fit  into the portfolio                                                                    
in the future.                                                                                                                  
                                                                                                                                
Mr.  Burns  replied  that  APFC was  required  to  obtain  a                                                                    
specific return. There had not  been many projects available                                                                    
in  Alaska. He  detailed  that the  corporation invested  in                                                                    
infrastructure  projects  via   [pooled]  funds  with  other                                                                    
investors. He remarked that he  would inform other investors                                                                    
if an  appropriate project emerged  in Alaska.  He discussed                                                                    
that  APFC was  potentially interested  in more  Alaska real                                                                    
estate; however, it  would be possible for  APFC to overheat                                                                    
the   market   very   quickly.  He   elaborated   that   the                                                                    
institutional size  the corporation would need  to invest in                                                                    
was substantial;  there were not  institutional-sized deals.                                                                    
He  continued that  the  real estate  market  in Alaska  was                                                                    
pretty well  balanced. He reiterated  that APFC  could upset                                                                    
that market  fairly quickly. He  added that one of  its real                                                                    
estate  managers  was  tasked  with  looking  for  deals  in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Representative   Wilson  clarified   her   interest  in   an                                                                    
infrastructure project such  as the pipeline or  a Liquid to                                                                    
Natural Gas (LNG)  plant on the North  Slope. She understood                                                                    
that Alaska did  not have very large  real estate investment                                                                    
opportunities,   but   she    believed   there   were   mega                                                                    
infrastructure projects that APFC could invest in.                                                                              
                                                                                                                                
Mr.  Burns responded  that  APFC had  been  directed by  the                                                                    
legislature in  statute to not  act as a lender  or investor                                                                    
of  last resort.  He  explained that  APFC  would prefer  to                                                                    
invest in Alaska if the  numbers worked. The corporation did                                                                    
not want  to go into deals  that required it to  locate $200                                                                    
million (or other) in low-cost capital.                                                                                         
                                                                                                                                
Vice-Chair Neuman asked whether  APFC had any investments in                                                                    
Alaska. Mr. Burns  replied it had two  investments in Alaska                                                                    
including  the  Goldbelt  Building  in  Juneau  and  an  old                                                                    
mortgage of  approximately $60,000.  He elaborated  that the                                                                    
mortgage was the remainder of an old program.                                                                                   
                                                                                                                                
2:43:59 PM                                                                                                                    
                                                                                                                                
Ms. Achee  added that  APFC was not  averse to  investing in                                                                    
Alaska; statutes outlined that if  it was presented with two                                                                    
equal  investments (one  in Alaska  and  another outside  of                                                                    
Alaska)  it was  directed to  choose the  Alaska investment.                                                                    
Ultimately the  corporation's direction  was to  make money.                                                                    
She elaborated  that if a  mega project presented  itself in                                                                    
Alaska and the numbers worked  out, there would be no reason                                                                    
why  APFC would  not be  interested in  being in  a pool  of                                                                    
investors. She added that  diversification was important and                                                                    
the  corporation  would  not  invest  as  a  sole  financial                                                                    
supporter in a project.                                                                                                         
                                                                                                                                
Representative  Gara  asked APFC  to  keep  its eye  on  the                                                                    
development of  shale oil  on the  North Slope.  He surmised                                                                    
that  the development  may present  a potential  partnership                                                                    
investment opportunity.  He asked what kind  of cost savings                                                                    
could  be achieved  if some  of the  more expensive  private                                                                    
contracts could be replaced with in-house staff.                                                                                
                                                                                                                                
Mr.  Burns  answered that  the  next  step  would be  a  co-                                                                    
investment position  for private  equity that  would include                                                                    
the  same type  of follow-on  rights used  in infrastructure                                                                    
investments, which  saved on fees. There  were two positions                                                                    
for  international fixed  income  that had  not been  filled                                                                    
because  APFC had  veered  away from  the  asset class;  the                                                                    
corporation  was looking  to increasing  investments in  the                                                                    
area  and planned  to fill  the  positions. He  communicated                                                                    
that   approximately   half   of  the   savings   from   the                                                                    
international fixed income manager  had been realized due to                                                                    
APFC's divestment  in the asset  class. The  corporation had                                                                    
contemplated  a mathematically  driven  internal stock  fund                                                                    
that would  require a specific  market cap,  dividend yield,                                                                    
and price/earnings  ratio. The fund would  be quasi-passive.                                                                    
He  could   not  quantify  the  number.   The  corporation's                                                                    
operating budget request was  approximately $12 million, but                                                                    
its  manager  budget  was  at  least  10  times  larger.  He                                                                    
communicated  that  there  were currently  some  investments                                                                    
that the corporation would not  consider. Things that seemed                                                                    
out of  reach currently  may be  reachable if  interim steps                                                                    
were  taken over  time. He  remarked on  the number  of APFC                                                                    
positions.                                                                                                                      
                                                                                                                                
Ms. Achee clarified that there  were currently 38 positions.                                                                    
Mr. Burns  added that  two of  the positions  were currently                                                                    
vacant.                                                                                                                         
                                                                                                                                
2:48:45 PM                                                                                                                    
                                                                                                                                
Representative  Gara  asked  whether APFC  would  be  coming                                                                    
forward with  a plan  regarding bringing  positions in-house                                                                    
for cost savings.  Mr. Burns replied that  APFC was planning                                                                    
a  board   meeting  that  would  focus   on  refreshing  the                                                                    
corporation's  strategic  plan  later  in  the  spring.  The                                                                    
entity only provided one service,  which was to manage money                                                                    
for returns. He  believed it may be possible  to provide the                                                                    
legislature   with   a   multi-year   plan   the   following                                                                    
legislative session.                                                                                                            
                                                                                                                                
Ms. Achee elaborated that the  board had been thinking about                                                                    
the  ideas; the  three  positions received  for  FY 13  were                                                                    
phase  1 of  a plan  devised by  the board  in the  past two                                                                    
years. She  stated that growth  had been taken in  a managed                                                                    
approach.  She relayed  that the  corporation would  present                                                                    
additional  phases  in future  years  until  it reached  the                                                                    
point  where  management  could   not  be  internalized  any                                                                    
further.  She  communicated  that   it  was  challenging  to                                                                    
attract talented staff  from out of state  that would enable                                                                    
the corporation to internalize some of the management.                                                                          
                                                                                                                                
Mr.  Burns  noted  that  it  may  be  advantageous  for  the                                                                    
corporation to have an office out  of state if it planned to                                                                    
invest  heavily in  private  equity  and co-investments.  He                                                                    
detailed  that  it  was  necessary  to  be  with  the  other                                                                    
investors  on a  daily  basis. He  was  uncertain where  the                                                                    
employees would  be located (e.g.  New York,  San Francisco,                                                                    
or other).  He discussed the importance  of interaction with                                                                    
gatekeepers   and  those   running   underlying  funds.   He                                                                    
clarified  that  the  corporation  was  not  moving  out  of                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Ms.  Achee agreed  that the  corporation did  not intend  to                                                                    
leave Alaska.                                                                                                                   
                                                                                                                                
Co-Chair Stoltze  suggested looking  to the  Alaska Railroad                                                                    
for advice on  how not to develop the  urban transfer center                                                                    
property  at  Tyson's  Corner.   He  observed  a  shale  oil                                                                    
investment seemed  like a  good deal;  however, it  would be                                                                    
moving money  from one state  pocket into the PFD  given the                                                                    
way  tax credits  worked. He  surmised the  public would  be                                                                    
unhappy if tax credits were  taken from the General Fund for                                                                    
deposit into the PFD.                                                                                                           
                                                                                                                                
2:52:54 PM                                                                                                                    
                                                                                                                                
Mr.  Burns answered  that  he was  uncertain  about how  the                                                                    
shale  credits would  work. He  reminded the  committee that                                                                    
APFC  had no  use  for  tax credits.  He  surmised that  the                                                                    
investment may be good for a tax paying entity.                                                                                 
                                                                                                                                
Co-Chair  Stoltze  made  a  remark  about  tax  credits  and                                                                    
politics. Mr.  Burns noted  that APFC was  not a  tax payer.                                                                    
Co-Chair Stoltze  understood and noted that  his comment may                                                                    
have been editorial.                                                                                                            
                                                                                                                                
Representative  Kawasaki asked  about external  managers and                                                                    
brokers and wondered how  frequently contracts were reviewed                                                                    
and  turned over.  He  discussed the  history  of APFC.  The                                                                    
permanent  fund of  other states  such as  Wyoming, Montana,                                                                    
New  Mexico, and  others did  not come  close to  the Alaska                                                                    
fund. He understood that making  money was the corporation's                                                                    
primary goal; however,  he lamented that the  goal could not                                                                    
include Alaskan investments.                                                                                                    
                                                                                                                                
Mr. Burns answered  that it varied slightly  by asset class.                                                                    
He informed  the committee  that its  equity staff  had been                                                                    
hired to  oversee the  managers on a  daily basis  to ensure                                                                    
that APFC's  directives were followed. He  communicated that                                                                    
real  estate  worked  more  with  external  managers;  fixed                                                                    
income  staff  monitored  the   few  external  fixed  income                                                                    
managers. He discussed  that monitoring managers performance                                                                    
across  the asset  classes was  a primary  duty of  the APFC                                                                    
staff. He  addressed manager turnover and  relayed that APFC                                                                    
had  let  managers  go due  to  poor  performance;  however,                                                                    
managers were  terminated due to  other reasons as  well. He                                                                    
stated that if a manager had  bad year it was the worst time                                                                    
to  get rid  of  them. He  compared  the job  to  that of  a                                                                    
fireman   running  towards   the  fire.   He  relayed   that                                                                    
additional  causes  for  termination included  a  change  in                                                                    
ownership, the  replacement of a  managerial team,  a change                                                                    
in finances, an ethical lapse occurred, or other.                                                                               
                                                                                                                                
2:57:53 PM                                                                                                                    
                                                                                                                                
Representative Kawasaki was curious  about the management of                                                                    
APFC. He  mentioned the number of  employees and contractors                                                                    
worldwide.  Ms. Achee  answered that  APFC had  38 full-time                                                                    
employees;  the  two  fixed income  positions  were  vacant,                                                                    
which APFC  hoped to fill by  the end of the  current fiscal                                                                    
year. There were roughly 60  external contractors across all                                                                    
of  the  corporation's asset  classes  (listed  on the  APFC                                                                    
website).  The internal  operating budget  was approximately                                                                    
$11.5 million for  FY 14 and slightly over  $100 million for                                                                    
external managers.  She pointed  to expertise  and specialty                                                                    
provided by  external managers  and noted  that some  of the                                                                    
firms  were  small (APFC  sized)  whereas  others were  much                                                                    
larger global firms.                                                                                                            
                                                                                                                                
Mr. Burns  added that  APFC was large  enough to  access the                                                                    
best  talent  in  the  world. He  pointed  to  the  external                                                                    
management  cost of  approximately  $114 million  for FY  14                                                                    
only represented  external manager fees that  were billed to                                                                    
APFC.  Certain asset  classes  (e.g.  real estate)  retained                                                                    
fees; they were taken as a reduction in income.                                                                                 
                                                                                                                                
Ms.  Achee  invited legislators  to  visit  the APFC  office                                                                    
anytime.                                                                                                                        
                                                                                                                                
Representative Kawasaki  asked if APFC was  subject to state                                                                    
procurement  codes when  it hired  for  contracts. He  asked                                                                    
whether  fees were  reviewed frequently.  Mr. Burns  replied                                                                    
that  generally  the  state did  follow  procurement  codes;                                                                    
however, there was an exception for any fiduciary services.                                                                     
                                                                                                                                
Ms. Achee  elaborated that for non-fiduciary  contracts APFC                                                                    
followed the  state procurement code. A  similar process was                                                                    
used  for fiduciary  contracts;  proposals  were scored  and                                                                    
compared. The corporation was not  required to make a change                                                                    
to  its general  consultant  Callan Associates,  but it  did                                                                    
choose  to  do  a   contract  renewal  on  occasion;  Callan                                                                    
Associates  had twice  beaten other  companies in  a request                                                                    
for proposal process. She noted  that the state pension fund                                                                    
used the same process.  She highlighted that the corporation                                                                    
did  not fall  under  the state  salary structure;  statutes                                                                    
directed the APFC board to  set the fund's salary management                                                                    
program.                                                                                                                        
                                                                                                                                
3:02:11 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  discussed that  the committee  would not                                                                    
meet the following day.                                                                                                         
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:02:39 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:02 p.m.                                                                                          

Document Name Date/Time Subjects
201302_APFCforHFIN2.pdf HFIN 2/5/2013 1:30:00 PM
Perm Fund Corp Overview